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Recent Fall in Oil Prices May Preview an Energy Bear Market

With the recent plummeting of oil prices, the $64,000 question is asked again-is it a greater supply or a weakening of demand that has caused lower oil prices.

As always, there are views to support both sides and most likely is a combination of an increase in supply and a diminish of demand. There are competing views to what extent oil prices are most susceptible to a change in demand versus a change in supply.

Beginning in the summer of 2018, production for oil supply had increased greatly. While production in Iran and Venezuela decreased, the United States, Russia and the Levant compensated for shortfalls throughout the world. Countries in the Middle East, specifically Saudi Arabia, increased oil supply, more than outweighing restrictions and sanctions imposed on Iran.   However, while the International Energy Agency made a call to arms for greater production of oil, it is China’s looming recession that has contributed to the fall of oil prices. China is currently importing over 8 million barrels a day of crude oil which is a significant increase from 2004 when it imported a little bit over 2 million barrels a day.

2014-2015 was the last time the price of oil plummeted. It is not a coincidence during that time the Chinese economy decelerated while the United States oil production blossomed with the shale boom. One factor China must face is its credit issue. Its economy has been slowing down over the years, but while its economy thrived it was based on debt. Now with the slowdown in its economy and of massive amount of debt, this only increases worries among economists about China’s imports and whether they could maintain the same level as in previous years.

There has always been a correlation between the London Metals Exchange Index and the price of crude oil. Industrial metals and oil prices have historically corresponded to major economic transitions. The London Metals Exchange Index has been in decline since June of this year.

The knee-jerk response to falling prices has been to cut back on the supply. However, this has not worked in the past, especially dealing with OPEC countries. Individual countries cannot resist trying to sell more volume of oil than other countries, albeit at lower prices. Many times, countries establish and strengthen overall importing and exporting ties with other countries, which far outpaces advancements in a single commodity.

At the end of the day, regardless whether oil prices dropped due to greater supply or lack of demand, this may be the catalyst of a tremendous bear market on the horizon.